Simplifying business formalisation and eliminating outdated formalities is often a good way of improving the institutional environment for firms. Unfortunately, the World Bank's Doing Business project is harming such policies by promoting a reform agenda that gives them priority even in countries lacking functional business registers, so that the reformed registers keep producing valueless information, but faster. Its methodology also promotes biased measurements that impede proper consideration of the essential tradeoffs in the design of formalisation institutions. If Doing Business is to stop jeopardising its true objectives and contribute positively to scientific progress, institutional reform and economic development, then its aims, governance and methodology need to change.

Corporate governance developments in the Netherlands have concentrated on two distinct legal issues: first, the history and existence of the so-called ‘structure regime’ for large companies and, second, the discussions about a code of conduct for listed companies. In this article, both developments shall be examined. The structure regime reflects the traditional preference in the Netherlands for the stakeholders approach. The discussions about a code of conduct for listed companies have recently placed the issue of shareholders' interests more prominently on the agenda. This prompted the legislature to adopt the Company Structure Reform Act of 2004. With this piece of legislation, a first step has been taken towards granting more power to shareholders to the detriment of other stakeholders. Whether or not this will be the first step of a further development in the direction of a greater focus on shareholders' interests is hard to predict at this point in time.

This article considers the impact of the financial crisis reform agenda on EU investor protection regulation. It argues that retail market regulation is becoming associated with a consumer protection agenda and that a more interventionist approach to the retail markets is following. The influences which are shaping this ‘consumerisation’ of EU investor protection regulation, and the benefits and risks of the new approach, which are particularly apparent in the product intervention sphere, are considered.

Since the mid-1990s, there has been much talk of the convergence of corporate governance systems to Anglo-American standards, and several trends have pointed in this direction. In this paper, however, Steen Thomsen argues that US/UK corporate governance is also converging to European standards through the concentration of ownership, increasing levels of insider ownership, the separation of management and control in more independent boards, the deregulation of the banking system and the increasing importance of stakeholder concerns. Support for the mutual convergence hypothesis is found in a statistical study on the evolution of ownership concentration in 2,238 companies during the 1989-1998 period. Ownership concentration, which is substantially higher in Continental Europe than in the United States and the United Kingdom, has been increasing in the United States and the United Kingdom and decreasing in Europe. However, the process is slow, and even if the observed trends were to persist, differences in corporate governance between Europe and the United States would persist for decades. Moreover, a regime change away from market governance may be under way following the collapse of the recent stock market bubble and the wave of financial scandals in the United States

After Enron, WorldCom, and other US business scandals, politicians in Washington faced enormous pressure to take swift action to address seemingly widespread malfeasance at US corporations. So only twenty-nine days from the disclosure of the accounting irregularities at WorldCom, Congress passed with near unanimity the Sarbanes-Oxley Act of 2002. When President Bush signed the law, he claimed it was one of ‘the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.’ The President significantly understated the case, however, because the Act does much more than reform the laws applicable to US-based issuers – a substantial number of the Act's provisions reach overseas to affect foreign private issuers whose securities trade in the United States.

This paper re-evaluates the corporate governance concept of ‘board independence’ against the disappointing experiences during the 2007-08 financial crisis. Independent or outside directors had long been seen as an essential tool to improve the monitoring role of the board. Yet the crisis revealed that they did not prevent firms' excessive risk taking; further, these directors sometimes showed serious deficits in understanding the business they were supposed to control, and remained passive in addressing structural problems.

A closer look reveals that under the surface of seemingly unanimous consensus about board independence in Western jurisdictions, a surprising disharmony prevails about the justification, extent and purpose of independence requirements. These considerations lead me to question the benefits of the current system. Instead, this paper proposes a new, ‘functional’ concept of board independence. It would redefine independence to include those directors that are independent of the firm's controller, but, at the same time, it would require them to be more accountable to (minority) shareholders.

At the close of the twentieth century, U.S. corporate scholarship was dominated by a principal-agent paradigm that assumed that shareholders were the principals or sole residual claimants in public corporations, and also assumed that corporate directors were the shareholders' agents. This approach led many corporate scholars to assume that the proper purpose of the corporation was to maximize shareholder wealth and that the chief economic problem of interest in corporate law was the “agency cost” problem of getting corporate directors to focus on this goal.

There are basic aspects of U.S. corporate law, however, that the principal-agent model cannot explain. These include directors' extensive and sui generis legal powers; the fact that directors control dividends; the device of legal personality; and the open-ended rules of corporate purpose. These corporate law “anomalies” have prompted contemporary economic and legal scholars to begin to move beyond a focus on agency costs and to pay attention to a second economic problem that arises in public corporations: the problem of protecting specific investment. When corporate production requires more than one individual or group to make specific investments, problems of intrafirm opportunism arise if shareholders try to exploit each other's specific investments or try to exploit the specific investments of creditors, employees, customers, and other groups. Board governance, while worsening agency costs, may provide a second-best solution to such intrafirm rent-seeking. This perspective explains many important corporate law “anomalies” that cannot be explained by the principal-agent model.

It also suggests a pressing need to revisit conventional notions of corporate purpose. Focusing on the problem of specific investment suggests that the proper purpose of the public corporation is not maximizing shareholder wealth, but promoting long-term, value-creating economic production under conditions of complexity and uncertainty, in a fashion that provides surplus benefits not only to shareholders but to other groups that make specific investments in corporations as well. This corporate objective is difficult to measure, much less maximize. Nevertheless, it may provide a better gauge of good corporate governance than the simplistic rubric of shareholder wealth.

While the corporate bankruptcy regime of the United States provides for a so-called debtor-oriented regime, many European corporate bankruptcy regimes could hitherto be labelled as creditor-oriented. Yet bankruptcy reform in Europe generally emphasizes the need for introducing schemes that facilitate business rescue, which has already led several European countries to add reorganization mechanisms to their bankruptcy laws. Surprisingly, on both sides of the Atlantic, policy makers pay little attention to corporate bankruptcy as a corporate governance mechanism. This paper argues that the comparative efficiency of corporate bankruptcy regimes cannot be considered separately from the governance structures of firms that make use of the bankruptcy laws. To evidence this, the paper analyzes two types of governance structure, namely that of the small and medium-sized firm with a concentrated secured bank lender and that of the publicly held firm with a dispersed ownership structure. This account gives rise to a reformulation of the trade-offs made by debtor- and creditor-oriented regimes and suggests that different optimal regimes may exist for different types of firms.

This essay, prepared for a University of Cambridge conference on ‘Principles Versus Rules in Financial Regulation’, posits a new issue in that debate. Although principles-based regulation is thought to more closely achieve normative goals than rules, the extent to which that occurs can depend on the enforcement regime. A person who is subject to unpredictable liability is likely to hew to the most conservative interpretation of the principle, especially where that person would be a potential deep pocket in litigation. This creates a paradox: unless protected by a regime enabling one in good faith to exercise judgment without fear of liability, such a person will effectively act as if subject to a rule and, even worse, an unintended rule.

This paper examines the relationship between blockholder ownership, dividend policy and firm value in the largest EU and US companies during 1988–1998. Large owners may benefit other shareholders by effectively controlling company managers, but may also differ from minority investors by a preference for retained earnings, from which they derive private benefits of control. This paper analyses these effects in a non-technical way using simple correlation analysis. The level of blockholder ownership in continental Europe is found to be much higher than in the US/UK, whereas firm value is somewhat lower. A negative association is found between blockholder ownership and firm value in continental Europe, which indicates that the level of blockholder ownership is excessive from a minority shareholder viewpoint. Moreover, although blockholder ownership levels in Europe are not generally associated with lower dividends, increases in blockholder ownership are found to be associated with decreasing dividends, and the stock market appears to respond more favourably to increasing dividends in companies with a high level of blockholder ownership. In the US/UK, higher blockholder ownership is generally associated with lower dividends, which are again negatively correlated with firm value. In both the EU and the US, the results therefore point to conflicts of interest between large blockholders and minority investors, but more strongly so in Europe.

This paper examines the development of the legal framework regarding fiduciary duties of directors in China. The concept of fiduciary duty was introduced by the 2005 revisions to China's Corporate Law. The implementation of fiduciary duties in China has encountered considerable obstacles because of the inherent weakness of the legal system. The legal texts are simple, vague and rigid. In the enforcement process, formalised judgments have placed limitations on precedent creation, thus reducing the deterrent effect, and the judicial system has shown reluctance to intervene in matters related to directors' duties in listed companies. There have been improvements, however. In a limited number of judicial decisions, courts have attempted to more clearly define the meaning of directors' fiduciary duties. In the penalty decisions of the China Securities Regulatory Commission (CSRC), the duties of directors have been interpreted in a more sophisticated manner.

This paper is concerned with the risks to creditors from strategic business decisions taken by directors. It seeks to explain both why the law should impose creditor-regarding duties when the shareholders no longer have any substantial equity in the company and why such duties should not be imposed when the shareholders still have a substantial economic interest in the company. It goes on to argue that duties on directors to put the company into a formal insolvency procedure once the company has reached a state of insolvency do not adequately meet the interventionist criterion. The incidence of such duties depends in part on whether a balance sheet or a cash flow test is used for insolvency, but in any event duties to open formal insolvency procedures are too rigid unless they operate only when all hope of rescue has disappeared. However, the paper also argues that the need to promote a ‘rescue culture’ for companies in financial distress may lead the legislature to limit the creditor-regarding duty arising before, but in the vicinity of, insolvency to cases of liquidation and not to extend it to companies being handled through procedures whose main aim is to save the company or (parts of) its business as a going concern.

The shadow banking system is the one that conducts credit, maturity and liquidity transformation outside regular banking mechanisms. Chinese practices largely fit into this concept. However, unlike their foreign peers, Chinese shadow banking institutions have been intertwined into a complex whole and have achieved credit intermediation usually through wealth management products, often using the problematic asset-pool model. They are also substantially influenced by the unique political economic dynamics in China, such as the rigid financial licensing regime and credit policy control. Both the supply and demand ends of funding have provided those activities with new features, for instance, the P2P lending marketplaces and local government financing vehicles. Chinese government agencies have interplayed responsively and proactively with the market via rulemaking and enforcement, in particular recently, with the aim to fix loopholes, level the playing field and limit regulatory arbitrage. However, further efforts are imperative in order to develop moderate and appropriate regulation and draw clearer legal boundaries.

In the wake of the financial crisis considerable momentum has built up behind proposals to extend central counterparty (CCP) clearing in the over-the-counter derivatives markets. However, implementation is proving complex. This paper argues that one cause of this complexity is that the public sector is seeking to incorporate into legislation (and require the wider use of) a privately owned and operated risk management mechanism. As a matter of law, the paper argues that CCP clearing can be understood as a market-generated ‘legal device’; in other words, one designed to support the markets by means of the interaction of various private law techniques. Following this analysis through, the paper highlights the benefits and drawbacks which derive from the legal techniques underlying CCP clearing (standardisation of contracts, asset-backing, netting and so on) and argues that these qualities are inherent to the device. It concludes that the inherent capacity of CCP clearing gives rise to a qualitatively different set of challenges for policymakers to those arising from technical implementation and it explains that both types of problem need to be addressed if the CCP prescription is to be effective.

The European framework for creditor protection has undergone a remarkable transformation in recent years. While the ECJ's Centros case and its progeny have introduced free choice with respect to the State of incorporation, and hence the substantive company law regime, the European Insolvency Regulation has implemented uniform conflict of laws rules for insolvencies. However, this regime has opened up some forum shopping opportunities. This article analyzes possible consequences of regulatory competition and forum shopping for creditors and argues that the ‘insolvencification’ of corporate law creditor protection mechanisms will not enable national policymakers to impose their respective ideas about creditor protection on firms in a fully-fledged manner.

Corporate mobility in Europe continues to be on the rise, both creating space for regulatory arbitrage by companies and influencing legislative decisions in corporate law and related fields. This has triggered debates in European company law that centre on questions of harmonisation, cross-jurisdictional convergence and the superiority of certain regulatory approaches and legal families. This article uses a large cross-country sample of EU Member States to classify legal strategies in corporate governance and assess claims of convergence and the superiority of legal families. We analyse board structure, the most important duties of directors, namely the duties of care and loyalty, questions of enforcement, and the position of directors in the vicinity of insolvency, and develop a taxonomy of legal strategies across the Member States. We find that, in spite of differences in regulatory technique and legal tradition, the effect of the legal strategies employed by the Member States is often remarkably similar and legal systems exhibit interconnections in the form of mutual learning across borders. In addition, we show that, in contrast to claims by parts of the literature, judicial innovation is not restricted to particular legal families. We argue that all legal families are, in principle, well equipped to react to new developments and draw on general or unwritten principles of law to fill regulatory gaps. However, a precondition for the emergence of effective rules seems to be a sufficiently large body of case law and, accordingly, access to the courts and an efficiently functioning judicial system. Consequently, we submit that questions of enforcement are of greater importance than a particular legislative or regulatory style.

A technology often reaches perfection when its successor is already in place. Miraculously speedy and reliable punch card readers were finally available on the market when demand shifted to personal computers, to cite only one example. Do constitutions follow the same evolutionary pattern? Constitutional law, in general, and the doctrine of fundamental freedoms, in particular, are in admirable shape. Their dogmatics have been amply tested; they are elegant and rich. But they have been developed for the nation state. Yet governance reality is increasingly different. The state is competing with foreign, international and private governing authorities, or it is joining them in hybrid efforts. Will deconstitutionalisation ensue? Or will the existing constitutions be able to face, or even alter, the new reality?

Our analysis focuses on whether future changes in the GATS regulatory framework might eventually provide better outcomes in terms of trade liberalisation. We start our analysis by providing a succinct overview of the GATS framework of rules and principles, focusing in particular on the implementation of that framework so far. Then, we focus on three issues – public services, safeguards and domestic regulation – that may have important implications for the GATS regulatory framework. In doing so, we do not call into question the negotiating agenda as it has been established by negotiators and instead provide an evaluation on its merits. In two cases – safeguards and domestic regulation – the negotiating mandates are well established, while in the third case – public services – although no formal negotiation has been envisaged, the issue as such has the potential to influence negotiating outcomes in key sectors, such as education, health, postal, energy and environmental services.

In our view, the best solution to the ‘public services’ conundrum is not a drastic reduction of the scope of GATS by excluding specific sectors from its provisions. Instead, increased awareness of the stakes involved in the liberalisation of socially sensitive service sectors may help WTO Members shape their commitments in light of their political, social and economic interests in those sectors. In the case of safeguards, after providing an analysis of the main arguments for such a mechanism, we show that the existing framework can adequately take care of concerns arguing in favour of temporary protection. Unlike the negotiations on safeguards, no WTO Member seems to question the desirability of developing further disciplines on domestic regulation as they are understood by the GATS. After analysing the case for horizontal disciplines, we conclude that such a horizontal approach should be complemented without delay with a sectoral approach that could cater for specific regulatory problems not being addressed in the Article VI.4 work programme. In our view, there are good reasons to try to complement the horizontal approach with a sectoral focus that would likely take the form of additional commitments under Article XVIII GATS.

In this paper, we use case studies to document how dominant shareholders have circumvented mandatory bid rules to appropriate wealth from minority shareholders. Dominant shareholders are numerous in Continental Europe. Creative compliance with mandatory bid rules reveals the failure of boards and regulators to protect minority shareholders and the difficulties of legislating in this area. We propose enhanced means for protecting their interests.

The Sarbanes-Oxley Act and the Securities Exchange Commission move too quickly when they prod the Financial Accounting Standards Board, the standard setter for US GAAP, to move immediately to a principles-based system. Priorities respecting reform of corporate reporting in the US need to be ordered more carefully. Incentive problems impairing audit performance should be solved first through institutional reform insulating the audit from the negative impact of rent-seeking and solving adverse selection problems otherwise affecting audit practice. So long as auditor independence and management incentives respecting accounting treatments remain suspect, the US reporting system holds out no actor plausibly positioned to take responsibility for the delicate law-to-fact applications that are the hallmarks of principles-based systems. Principles, taken alone, do little to constrain rent-seeking behaviour. In a world of captured regulators, they invite applications that suit the regulated actor's interests. Rules, with all their flaws, better constrain managers and compromised auditors. Broadbrush reformulations of rules-based GAAP should follow only when institutional reforms have succeeded.